Episode 3 of our Communal Property Essentials Series.
In this third episode of our communal property essentials series I will cover the 4 key components you need to use to create an accurate annual budget for your apartment building or resort.
In this Third episode of our Communal Property Essentials series I will cover the 4 key components you need to create an accurate annual budget for your apartment building or resort.
Why is an accurate budget important?
As a management committee one of your important tasks is the calculation of the budget. Personally I think this is probably the most important duty of the management committee.
When you think about it, If you calculate your budget incorrectly your either going to end up with unpaid bills & reduced service levels, or you will need to scramble to get owners to make an extra payment in the middle of the financial year. Fun!
On top of this, you will also have exposed yourself to liability as a unit owner argue you failed to meet the committee’s legal obligations to maintain the building. Your building could be sued under the disabilities law over that lift that had to be closed, or because you are left uninsured due to a unpaid insurance policy when an accident happens on site.
So, how do you create an accurate bud get… well you look at 4 key components.
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1: The Importance of Historic Records
Hopefully you have folders with years of communal expenses for your building. You should put all these together into a single spreadsheet showing the total for each expense type year by year. To the total spent on electricity in 2016, a separate total for 2017 and so on.
With utilities don’t just put the cost, I suggest you put down the usage as well.
This way you have a record showing how many units of electricity you use each year. And you can then use the current price per unit to estimate the cost at the current prices for that usage. Providing the electricity price does not change drastically, but I will cover that in the next component.
You should also highlight anything out of the ordinary for that year. So if you had a major water leak last year, you know why the usage was higher than normal last year and that this is not an ongoing increase to plan for this year.
If you don’t have records, or know what types of records to keep, well I will let you into a small secret, that’s going to be the subject of the next video in this series.
2: Budgeting for the unexpected
Wouldn’t it be great if everything always went to plan all the time. Yea that’s not gonna happen. The only thing you can guarantee to expect, is the unexpected.
But you can plan for that too.
So when you have your estimated costs you should add a small contingency margin to cover any difference. I generally recommend about 10% on top of whatever the estimate is for that expense.
You should add this contingency margin to anything that’s subject to change like utility costs, general maintenance budgets and so on. Anything that is highly unlikely to change like a fixed management fee you can skip this step.
In addition to these individual contingency margins to cover if a individual expense is more than predicted, I also suggest you also include an extra budget item to cover anything that’s completely out of the unexpected. You call this “out of budget expense”. The amount is up to you, but I find that if you set this as 10% of the overall budget amount for all the expenses.
If you do this, then you have allot more protection against running out of funds due to higher than expected expenses, or a unexpected out of budget expense.
But if these don’t happen, this money does not disappear, you will have these as a surplus at the end of the financial year which can either be transferred back to unit owners (a welcome bonus especially if your financial year runs January-December) or it can be carried over to the next budget lowering next years fees.
And Yes, you should be changing your fees every year based on this budget! I have another article all about this which you can read on my website.
3 One off Budget Items
If you know your swimming pool is on its last legs, and needs a new liner urgently, this is a one-off expense, but it needs to be planned for. Otherwise you will end up with an empty pool or need to find the money by stealing from one of the other budget items. And stealing’s not cool!
This is where you will find good records helps, as most items in your building have a predicted life expectancy, so if you know a pool liner normally lasts 10 years, and yours is 9 years old. Its going to be an expensive year!
4 Bad Debt Adjustment
One of the other things most commonly overlooked is budgeting for those unit owners who don’t pay their fees during that year.
Of course, you shouldn’t be ignoring theses owners and you must take every measure possible to collect this debt, but some of these recover actions, especially legal action through the backlogged Cyprus court system take time. Time where you have less income but the same level of expenses.
The way to budget for bad debt is using your records look at those units who you feel are unlikely to pay their share of this budget and add those expected unpaid fees together. So if you think that there will be 10,000 of unpaid fees last year then you need to budget for this bad debt this year.
You put this on its own budget line item and is called Bad Debt. The legal justification to include bad debt in the budget is a whole topic on its own and something I will cover in another video later in the year. But sufficed to say you need to include it, otherwise you guarantee to have a cash shortfall.
You will see that all of these key components have one thing in common, its far easier to implement if you have good records. And the different types of records you should keep and how to keep them will be the subject of the next episode in our communal property essentials Video Series.
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